Given Lido’s recent announcement to sunset stMATIC (their Liquid Staking Token implementation on Polygon), we propose freezing the stMATIC reserve on the Aave V3 Polygon market. This freeze would prevent users from increasing supply or creating new borrow positions, while maintaining functionality for repayments, withdrawals, and liquidations.
Motivation
The Lido community, through LDO token holder voting, has decided to discontinue the stMATIC token on Polygon for two main reasons: limited user adoption and insufficient staking fee revenue to offset maintenance costs.
Between January 15-22, 2025, stMATIC withdrawals will be temporarily paused. Effective immediately, stMATIC will cease to accrue any staking yield throughout the sunsetting process. Users can redeem stMATIC for POL/MATIC through the Lido UI until June 16th, 2025. After this date, redemptions will remain possible indefinitely through direct smart contract interaction, as stMATIC will maintain 100% collateralization at all times.
Due to the MATIC-correlated emode, stMATIC’s primary use case on Aave has been for leveraged positions. Following the suspension of yield accrual, this utility diminishes, leaving no advantages to holding stMATIC over POL directly. The current supply of 25.79M stMATIC (valued at $14.29M) represents a significant volume requiring transition. Notably, the current 0% supply rate indicates that borrow demand for stMATIC is insufficient to generate meaningful yield for suppliers.
ACI full support, as Lido is sunsetting activity on Polygon, stMatic yield will go to zero, making it unattractive as collateral compared to maticX in Aave.
Chaos Labs fully supports the proposal to freeze the stMATIC reserve on Aave V3 Polygon. With Lido deprecating stMATIC and halting yield accrual, the asset’s core utility as a liquid staking derivative is no longer viable. Freezing the reserve will halt the creation of new supply and borrow positions, effectively stabilizing the market while still allowing users to repay loans, withdraw funds, and execute liquidations.
Motivation
The deprecation of stMATIC diminishes its attractiveness for yield-driven strategies and collateral use. Although the asset does not currently pose any risks to the Aave ecosystem, we expect its DEX liquidity to reduce significantly following the deprecation, which could complicate liquidations if uncorrelated collateral positions become stressed. Most notably, while its most prominent use was to loop the asset with WMATIC to leverage the staking yield, a significant proportion of stMATIC on Aave is deployed as collateral for non-correlated assets.
We recommend implementing the proposed freeze on the stMATIC reserve to prevent the creation of new supply or borrow positions. This measure ensures users can begin transitioning out of stMATIC positions without exacerbating risks through additional activity. Gradually increasing the stMATIC Liquidation Bonus outside of eMode should also be considered in case of reduced DEX Liquidity.
Additionally, we note that the largest supplier of stMATIC on Aave holds the majority of the asset in the pool (87% of supplied stMATIC) and is deposited as of January 8th. While we do not expect the position to pose a risk given the full 1:1 backing of each stMATIC, Chaos Labs will closely monitor the market in order to determine a change to parameters if this position adopts risky behaviors.
Chaos Labs recommends freezing the stMATIC asset on Aave V3’s Polygon instance.
We will continue monitoring the market and propose additional changes, such as increasing the Liquidation Bonus, if the market dynamics change in the future.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
As Michigan Blockchain, we support the proposal to freeze stMATIC on Aave V3 Polygon. We think that it is a necessary step to mitigate risks following Lido’s decision to discontinue the asset due to low adoption and insufficient fee revenue.
As it will no longer accrue staking yield, stMATIC becomes an inferior option to MATIC or MaticX which is another liquid staking alternative. To mitigate the instant risk of the reduced demand for stMATIC on the Polygon market, Aave should prevent new users from taking exposure to an asset with a diminishing future while allowing existing users to manage their positions before a full removal is considered.
